15 September 2014

Fixed at last!

As is usual, on 20 September 2014 the rates of a number of payments in the Australian social security system will be adjusted to take into account increases in the consumer price index (CPI). The new rates were formally announced via this press release, with a detailed set of tables provided in the attachments available here.

One of the many figures provided in those tables is the 'partner income free area' and its new value appears to be the only clue that a wrong has been righted. That correction should, it appears, provide an increase in payment rates to some couple households that is significantly larger than announced in the press release.

In earlier posts on this blog I discussed what I believed to be an error in the way the previous government's carbon-price related household compensation had been implemented for some couples. This resulted in affected couples receiving less overall assistance than was promised. (If you are curious about the details, this post might be of interest.)

The new arrangements mean that the underpayments to couples will come to an end from 20 September. A one-off effect of this correction is that the couples currently being underpaid will get the standard CPI increase, plus an extra amount. Not only that, but the effect of the correction should also flow through to some couples getting income support payments (particularly Austudy payment) that are not normally increased on 20 September.

The increase announced for couples was $4.70 a fortnight each. There is also an increase to the income support bonus (which is a twice-yearly payment). For couples with no private income, the combination of these gives an increase to the household of $248 a year. However, for those couples who were being 'dudded' out of the correct household compensation amounts, the increase may be as much as $436 a year.

My first chart shows the increase for three different couple households, by private income.

Chart 1

The dual income couple (orange line) is not one of the household types who were disadvantaged by the implementation of the household assistance measures (the clean energy supplement, or CES). Their increase is just the standard CPI adjustment, so I've included them as a kind of reference base.

The blue line is a single income Newstart allowance couple - one of the affected household types - and you will note that from a private income of around $23,500 the increase becomes larger and persists that way until private income exceeds roughly $43,500.

Finally, I've included a single income couple where both are students. You'll notice that they don't get an increase until the private income of the worker reaches around $29,250 (actually they do pick up the general increase in the income support bonus, but at $3.60 a year it's too small to show up at this scale!). From that point the couple should get an increase that is actually larger than the standard CPI increase given to the dual income Newstart couple. The rather noticeable peak at the end of the Austudy example's payment range is because the non-working partner can now pick up Austudy that was previously excluded under the income test, but also gains access to the student startup scholarship.

The various spikes and bumps in the lines reflect the fact that even with a standard increase, the actual change in disposable income is affected by interactions of the rate increase with other parts of the tax-transfer system. Chart 2 shows this for one of the household types depicted above.

Chart 2

Here we can see that each member of the couple initially starts out with the same increase. However, that extra income support payment means that the working partner incurs a higher tax liability from around $16,500 in private income, reducing the net gain to the household. Once the working partner (P1) is no longer getting Newstart there is a further increase in Newstart to the non-working partner (P2). This extra income support does not trigger a tax liability as P2's taxable income is below the tax threshold (it's a single income couple example), but it does boost the households medicare levy liability. This is because the low income medicare levy arrangements are based on the couple's combined income. Finally, the extension to the Newstart allowance payment range caused by the higher payments overlaps with the income range in which the low income supplement was potentially available, removing entitlement to that payment.

So there you have it. After 18 months of getting less than they should have, payments for some single income households will finally be corrected. They can now participate equally in a new, but less financially punishing, rip-off that will occur if the Government gets its way and ceases indexing the clean energy supplement. A discussion of that one will have to wait for another day.